[Analysis] Innovating Insolvency | IBBI’s Progressive Approach to Personal Guarantor Cases

Table of Contents 

1. Introduction
2. Appointment of RP in Personal Guarantors Cases to streamline insolvency proceedings
3. Sharing a copy of report of RP with the debtor and the creditor for enhanced clarity
4. Mandatory creditor’s meeting in all Personal Guarantor insolvency matters
5. Conclusion

1. Introduction

The Insolvency and Bankruptcy Code (IBC) plays a pivotal role in providing a structured framework for insolvency resolution processes, ensuring fairness and transparency. The focus is on the rehabilitation of the debtor as opposed to adjudging him as insolvent. The Code establishes an objective trigger for initiating the insolvency resolution process, rather than relying on the commission of an act of insolvency.

On September 27, 2023, the Insolvency and Bankruptcy Board of India (IBBI) released a discussion paper on the appointment of the RP, sharing of report prepared by the RP with the personal guarantor and mandating the summoning of a meeting of the creditors.

The key highlights of the discussion paper are as follows:

2. Appointment of RP in Personal Guarantors Cases to streamline insolvency proceedings

As per Regulation 4(1)(a) of the IBBI (Insolvency Resolution Process for Personal Guarantors (PG) to Corporate Debtors) Regulations, 2019, an insolvency professional (IP) shall be eligible to be appointed as RP if he is independent of the PG. Further, an explanation gives several instances where the RP is considered independent of the PG. One of the clauses in the explanation specifies that the IP shall be treated as independent of the PG if he has not acted or is not acting as an interim resolution professional (IRP), RP or liquidator during the corporate insolvency resolution process (CIRP) or liquidation process of the CD, as the case may be.

Present Issues

The Board has noticed that, on numerous occasions, the appointed RPs often face challenges when trying to submit reports as required by section 99. This difficulty arises mainly due to the lack of cooperation from the PGs. The RPs involved in PG cases have limited access to the PGs’ financial records, making it complex for them to perform their duties as outlined in the Code, Rules, and Regulations.

Therefore, it is suggested that the IP handling the CD’s insolvency process might be better suited to also act as the RP in PG matters. This way, the insolvency proceedings can be conducted more efficiently and professionally.

IBBI’s Proposal

Now, the IBBI has proposed to omit the restriction provided under clause (i)(c) of the explanation to regulation 4(1). This clause provides that an IP shall be considered independent of the guarantor if he has not acted or is not acting as an interim resolution professional, RP or liquidator in respect of the corporate debtor.

This change will enable the creditors of the CD to appoint the IRP/RP/liquidator of the CD as RP in the PG matter, promoting enhanced harmonization of both processes. Even in the case of replacement of the IRP/RP/liquidator of the CD, the CoC in its commercial wisdom may choose to appoint a common IP for both processes.

Impact

The proposed change to remove the restriction will enable greater flexibility in appointing the same insolvency professional for both corporate debtor and personal guarantor cases, streamlining the insolvency process and enhancing efficiency.

3. Sharing a copy of report of RP with the debtor and the creditor for enhanced clarity

Section 99(10) of the IBC mandates the RP to share a copy of the report with the debtor or the creditor, as the case may be. Therefore, this provision empowers either the debtor or the creditor to receive a copy of the report prepared by the RP. A strict interpretation of section 99(10) requires the RP to give a copy of the report to either the debtor or the creditor, as the case may be.

In other words, the RP shall share a copy of the report with the debtor when the application is filed by the debtor and the copy of the report will be shared with the creditor when the application is filed by the creditor.

Present Issues

In certain instances, the IBBI observed that the Adjudicating Authority requests notices to be issued to both parties while deciding applications under Section 100. These notices are served to the parties along with the reports submitted by the Resolution Professional (RP).

To expedite the process, it is essential to clarify the provisions that require these reports to be shared with both parties, either when submitting them to the Adjudicating Authority or during the AA proceedings.

IBBI’s Proposal

The IBBI has now proposed to clarify the requirement for the RP to share the report of recommendations prepared under section 99(7) with both the debtor and the creditor in all cases. This will ensure that both the debtor and the creditor are well-informed about the evaluation and recommendations made by the RP, thereby promoting transparency and informed decision-making.

Impact

IBBI’s proposed clarification of sharing the report of recommendations with debtors and creditors enhances transparency, enabling informed decision-making in insolvency proceedings, which can lead to fairer outcomes and more efficient resolution processes.

4. Mandatory creditor’s meeting in all Personal Guarantor insolvency matters

Under the extant provisions, a PG submits a repayment plan under section 105 to the RP. Subsequently, the RP assesses the viability of the repayment plan and compiles a report on the payment proposal. Along with the report, the RP recommends the calling of the meeting of the creditors, if necessary. Where the RP recommends that a meeting of creditors is not required to be summoned, the RP is required to state the reasons for the same.

Present Issues

While the provision was intended to provide speedy resolution of matters in low-value cases, it is felt that the meeting of the creditors should be necessary in the case of PGs as such cases are complex in comparison to other cases of individual insolvencies.

The existing provisions, although well-intentioned, fall short in acknowledging the intricacies surrounding PG cases. Unlike other individual insolvency cases, PG matters often involve complex financial interdependencies, multiple creditors, and a broader impact on the overall insolvency resolution process.

IBBI’s Proposal

The IBBI has proposed to mandate the convening of a meeting of creditors in all PG insolvency matters, irrespective of the amount defaulted. This approach ensures that the collective voice of creditors is incorporated into the resolution process, providing a more comprehensive perspective on the repayment plan.

By making the meeting of creditors mandatory, the proposed amendment facilitates the active involvement of creditors in the resolution process, fostering a sense of ownership and collaboration among stakeholders.

Impact

The proposal to mandate creditor meetings in all personal guarantor insolvency matters, regardless of the default amount, is set to significantly enhance transparency and creditor participation in the resolution process, fostering greater collaboration and informed decision-making among stakeholders.

5. Conclusion

In conclusion, the recent discussion paper released by the Insolvency and Bankruptcy Board of India (IBBI) represents a significant step towards enhancing the effectiveness and transparency of the insolvency resolution process for Personal Guarantors (PGs). The proposed amendments address several key challenges faced by Resolution Professionals (RPs) in PG cases, with the aim of streamlining procedures and promoting fairness.

The IBBI’s proactive approach in addressing the intricacies of PG insolvency matters sets a positive precedent for the ongoing evolution of India’s insolvency framework. As these amendments take root, they hold the promise of expediting case resolutions, instilling greater confidence among stakeholders and contributing to the overall health and stability of the financial ecosystem.